SC order on interest waiver: PSU Banks may have to take Rs. 2000 crore hit

picture credits- deccan herald

A recent Supreme court judgement may be the reason that public sector banks may have to bear a burden of Rs 1,800-2,000 crore. The recent judgement came on the waiver of compound interest on all loan accounts which opted for moratorium during March-August 2020.

The judgement quantitatively covers the loans above Rs 2 crore. The loan bracket has been taken above Rs. 2 crores as loans below this got blanket interest on interest waiver in November last year. Compound interest support scheme for loan moratorium had cost the government Rs 5,500 crore during 2020-21 and the scheme had covered all borrowers including the prompt one who had not availed moratorium.

The government had in October, announced guidelines for the waiver of compound interest that was payable by borrowers who had opted for moratorium on their loan equated monthly instalments (EMI) between March 1, 2020 and August 31, 2020.

The central government had earlier in October filed an affidavit in the Supreme Court stating that it would waive interest on loans up to Rs 2 crore for select category of borrowers.

As has been reported by the banking sources, initially 60 percent of borrowers had availed moratorium, but gradually the percentage had come down to 40 per cent and even less as collection had improved with ease in lockdown. In corporate scenario, this was as low as 25 per cent as far as the public sector banks were concerned.

The banking sources have further stated that banks would provide compound interest waiver for the period a borrower had availed moratorium. For example, if a borrower had availed moratorium of three months, the waiver would be for that period.

As aforementioned, the RBI on March 27, 2020 had announced a loan moratorium on payment of instalments of term loans falling due between March 1 and May 31, 2020, due to the pandemic. It was noted later that the same was extended to August 3.

Besides, the sources have also stated that the order has not specifically specified a timeframe for the settlement of compound interest unlike last time. Therefore the banks can devise a mechanism of adjusting or settling it in a staggered manner.

On the other hand, Indian Banks’ Association (IBA) has suggested the government to compensate the lenders for interest-on-interest waiver. Reportedly, the government will take the crucial decision by taking various other details into consideration.

The Supreme Court last month, in lieu of the covid 19 crisis, had directed the banks that no compound or penal interest would be charged from borrowers for the six-month loan moratorium period, which was announced last year amid the COVID-19 pandemic. The court had additionally mentioned that the amount already charged would be refunded, credited or adjusted.

Respecting the policy decision, the apex court had  refused to unnecessarily interfere with the Centre and Reserve Bank of India (RBI’s) decision to not extend the loan moratorium beyond August 31 last year.

Rejecting the pleas for a complete waiver on interest, the court had maintained that such a move would have consequences on the economy. The bench had also stated that the complete interest waiver would affect depositors. Along with this, the court also rejected pleas for further relief in the matter.